How would government-run health insurance affect California?

WASHINGTON —With a huge number of residents who buy health care on their own and relatively few companies selling them coverage, California is just the kind of market in need of a new government-run insurance plan, supporters of the controversial proposal dominating much of the health reform debate say.

But some health care experts in California say it's far from certain that the public option, if it's even adopted, would become the low-cost, benefit-rich alternative to the private market that its proponents have touted. Nor, analysts say, is it likely the mortal threat to the insurance industry that opponents claim.

"In general I like the public option, but I'm highly skeptical that it's going to do what needs to be done" — namely, to lower health care costs and provide better care, said Lucien Wulsin, an attorney specializing in health care law and director of the Santa Monica-based Insure the Uninsured Project. "In some ways it's being oversold by the people who love it and oversold by the people who hate it."

In the best case, health care analysts say, a new public insurer could inject a dose of competition in the insurance market and serve as a useful benchmark for quality and cost, especially in markets dominated by one or two private insurance companies. While California boasts more competition than many other states, with five major firms doing business in the state and several other smaller players, Anthem Blue Cross and Kaiser Permanente still control nearly three-fifths of the state's health insurance market, according to a report this year by the American Medical Association.

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But the number of insurers is just one part of the equation, said former state Insurance Commissioner and newly elected Rep. John Garamendi, D-Walnut Creek. A government insurer could also help keep accountable private insurance firms that engage in bad behavior, he said, such as excessively denying claims for medical treatment.

"A public option would provide an automatic alternative to that kind of despicable behavior," Garamendi said. "People could walk."

Although Democrats continue to press for a government-run plan, a key demand of the party's liberal wing, it remains to be seen whether one will emerge from the grind of legislative negotiations in the coming weeks — let alone what form it takes. Both the reform bill passed by the House last weekend and a proposal being drafted by Senate Majority Leader Harry Reid, D-Nev., include different versions of one, but it's unclear that either would garner enough support among conservative Democratic senators to be included in final legislation.

If a public option does survive, it's likely to be in a weakened form.

Bowing to political constraints, legislative leaders already have abandoned some elements of a public option that could do the most to keep premiums down. Under the House bill, the government plan would have to negotiate with doctors and hospitals over payment rates — just as private insurers do — instead of simply tying them to what Medicare pays providers. And if medical providers deem the payments offered too low, they can refuse to do business with the public plan, thus limiting the network of doctors and hospitals available to its enrollees.

That lack of clout going in raises questions about whether a government plan would be able to negotiate a better deal, in the form of lower premiums, for consumers.

"It's just not clear that a public option would bring a whole lot of leverage to bargain for lower prices," said Marian Mulkey, a senior program officer for the California Healthcare Foundation.

Supporters say a public plan could pass on savings from lower overhead costs and money that would otherwise go toward profits. Overhead and profits span a wide range, from 5 to 10 percent of premiums for large companies that are self-insured, to 25 to 27 percent for companies in the small group market, to 40 percent or more for individual plans, said Jacob Hacker, a political science professor at Yale and supporter of the public option.

Any public plan is likely to be limited. Only about 30 million Americans — individuals buying insurance on their own, and employees of small businesses that don't offer coverage — would be eligible to enroll in the public option envisioned by the House bill. Within that pool, about one in five, or 6 million, would choose the new government plan, the nonpartisan Congressional Budget Office estimated recently. That would translate to fewer than 1 million Californians.

"The impact in California would likely be quite modest" if the House-approved public option was created, said Patrick Johnston, president and CEO of the California Association of Health Plans and a former state lawmaker for two decades. The concern, he said, is that over time the government plan would "morph into a Medicare for all" that increases the federal deficit and undermines the private insurance market.

Among California's largest insurers, Anthem Blue Cross' parent company, WellPoint, and United Healthcare oppose the public option; Kaiser Permanente and Blue Shield, which both operate as nonprofits, have not taken a position.

Others say that with a huge pool of potential customers in California — some 6.8 million residents are uninsured, and another 2.7 million people currently buy insurance on their own and would be eligible to sign up for a public plan — the public option could emerge as a stronger player in California than the CBO suggests.

One major reason the CBO projected that a public option wouldn't be very popular is because premiums could actually be higher than those offered by private sector insurers. That's because it would attract a less healthy group of customers drawn to the security of government-backed insurance, the report said, so overall health care costs would be higher.

Wulsin, the health care attorney, said that perhaps the biggest benefit of a public option would be to shift attention back to some of the issues getting short shrift in the current debate. For example, a government-run plan could experiment with new payment models, reimbursing doctors and hospitals for the health care outcomes they achieve, rather than the number of tests or procedures they perform.

"If it's going to succeed," Wulsin said, "it's going to have to be because it does something new and innovative."